Q4 2024 Earnings Summary
- Varonis is successfully accelerating its transition to SaaS and now expects to complete it by the end of 2025, a full year earlier than previously planned. This accelerated transition is anticipated to unlock growth opportunities post-transition due to improved sales productivity and upsell potential.
- Strong new customer growth is driving ARR momentum, with ARR from new customers growing approximately 50%. This growth is propelled by the simplicity of Varonis's SaaS platform, the Managed Data Detection and Response (MDDR) offering, and increased demand due to generative AI initiatives, which are raising awareness for the need to secure data.
- Increased demand driven by the proliferation of AI and Varonis's Copilot product is expanding their market opportunity. Varonis believes that almost every knowledge worker will eventually have Copilot, and as customers deploy AI technologies, they require robust data security solutions, positioning Varonis to capitalize on this trend.
- The accelerated transition to SaaS is impacting near-term revenue due to revenue recognition differences. In Q4, revenue missed guidance by $11 million, a 7% headwind, due to a higher-than-expected SaaS mix of 53% of ARR instead of the guided 49%.
- The focus on converting existing customers to SaaS is diverting sales efforts away from upsell opportunities. Executives acknowledge a lack of upsell because sales reps are prioritizing SaaS conversions over selling additional platforms, which may limit ARR growth from existing customers during the transition.
- Aggressive incentives to convert customers to SaaS may lead to customer resistance and potential attrition. Investors are concerned about ensuring the durability of the customer base when the company pushes customers more aggressively to transition to SaaS.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Total Revenues | Q4 2024 | no prior guidance | $162M to $167M | no prior guidance |
Non-GAAP Operating Income | Q4 2024 | no prior guidance | $20M to $22M | no prior guidance |
Non-GAAP Net Income per Share | Q4 2024 | no prior guidance | $0.13 to $0.14 | no prior guidance |
Diluted Shares Outstanding | Q4 2024 | no prior guidance | 135M | no prior guidance |
ARR | FY 2024 | no prior guidance | $635M to $639M | no prior guidance |
Total Revenues | Q1 2025 | no prior guidance | $130M to $135M | no prior guidance |
Non-GAAP Operating Loss | Q1 2025 | no prior guidance | ($14M) to ($11M) | no prior guidance |
Non-GAAP Net Loss per Share | Q1 2025 | no prior guidance | ($0.06) to ($0.04) | no prior guidance |
Shares Outstanding | Q1 2025 | no prior guidance | 113.6M | no prior guidance |
ARR | FY 2025 | no prior guidance | $737M to $745M | no prior guidance |
Total Revenues | FY 2025 | no prior guidance | $610M to $625M | no prior guidance |
Free Cash Flow | FY 2025 | no prior guidance | $120M to $125M | no prior guidance |
Non-GAAP Operating Income | FY 2025 | no prior guidance | $0.5M to $10.5M | no prior guidance |
Non-GAAP Net Income per Share | FY 2025 | no prior guidance | $0.13 to $0.17 | no prior guidance |
Shares Outstanding | FY 2025 | no prior guidance | 137.5M | no prior guidance |
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Achieving 20%+ ARR Growth
Q: How will you return to over 20% ARR growth?
A: We plan to accelerate our SaaS transition to complete it by 2025, two years earlier than initially planned. This acceleration, combined with the strong performance of our AI offerings like MDDR and Copilot, positions us to sustain 20%+ ARR growth. In 2024, new business grew by 50% in ACV, and we believe that post-transition, we'll be better equipped to upsell additional licenses and improve NRR. -
Accelerating SaaS Transition
Q: Why are you accelerating the SaaS transition?
A: We're accelerating the transition because our SaaS product offers customers 10x more value with 10% of the effort, providing better protection and efficiency. Rapid migration aligns with customer demand for effortless data security and allows us to deliver value faster. -
Impact on Revenue from Transition
Q: Did the faster SaaS transition affect revenue?
A: Yes, our revenue missed guidance due to the faster-than-expected SaaS transition. Increasing the SaaS mix to 53% of ARR resulted in an $11 million revenue headwind, but this reflects positive progress as we move to a ratable revenue model. -
AI Products Driving Growth
Q: How are AI products contributing to growth?
A: Our AI offerings, MDDR and Copilot, significantly drove growth, with new customer ARR accelerating to 50% in Q4. We've added nearly 100% more new users protected by our Microsoft 365 offering compared to 2023, indicating strong demand for AI-driven data security solutions. -
Preventing Customer Attrition
Q: How will you prevent attrition while pushing SaaS conversions?
A: We focus on demonstrating the superior value of our SaaS product, which offers better protection and capabilities like MDDR unavailable on-premises. We've seen minimal resistance; in fact, the transition is moving faster than expected, indicating strong customer acceptance. -
Pricing Uplift from Conversions
Q: Are you seeing pricing uplift when converting to SaaS?
A: Yes, we're experiencing a healthy uplift of 25%-30% in pricing with SaaS conversions. Pricing remains strong, and we see additional opportunities to sell more platforms once customers are on SaaS. -
Sustaining Growth Post-Transition
Q: How will you sustain growth after conversions wind down?
A: Post-transition, we'll be better positioned to upsell and cross-sell to our customer base. In 2024, growth was driven by new business, and we expect continued tailwinds from our rich platform and AI offerings to improve NRR and sustain growth. -
Pipeline and Backlog Health
Q: What is the health of your pipeline and backlog?
A: Our pipeline is healthy, with strong conversations on SaaS conversions and new customer acquisitions. We're initiating renewal processes earlier to facilitate conversions, positioning us well for 2025. -
Partnership with Microsoft
Q: How is your relationship with Microsoft impacting growth?
A: We have a strong partnership with Microsoft. While there is some feature overlap with Purview, our combined offerings provide greater value to customers. Together, Varonis and Microsoft deliver enhanced data security solutions. -
Resource Allocation During Transition
Q: How are you reallocating resources during the transition?
A: We're strategically incentivizing our sales team to focus on conversions without neglecting new business. We've made hires to support the transition, ensuring a smooth customer experience, while maintaining prudent expense management with ARR contribution margin at 16.6%. -
Free Cash Flow Growth
Q: Can you comment on your free cash flow growth?
A: We've made significant progress, with free cash flow reaching $108.5 million, doubling from last year. This reflects our prudent financial management during the SaaS transition. -
Confidence in Conversion Targets
Q: What gives you confidence in achieving SaaS conversion targets?
A: We've narrowed the parity gap between our on-prem and SaaS platforms and built automation for frictionless migration. With only 1/3 of customers converted over two years, we're confident in accelerating conversions and reaching 78% of ARR from SaaS by year-end 2025.
Research analysts covering VARONIS SYSTEMS.